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Wednesday, September 7, 2011

The trouble with the feed-in tariff

Many are still not aware of this but the so-called feed-in tariff when put into effect in the power sector is going to affect all of us. What is this new animal called feed-in tariff? How will it affect us?

As a background, Republic Act 9513 or the Renewable Energy Act of 2008 promotes the country’s development, utilization and commercialization of renewable energy resources. It provides that all stakeholders in the electric power industry shall contribute to the growth of the renewable energy industry of the country. To meet this objective, the National Renewable Energy Board (NREB), which is also created under the law, is empowered to set the minimum percentage of generation from eligible renewable energy resources and determine to which sector renewable portfolio standards shall be imposed on a per-grid basis.

To accelerate the development of emerging renewable energy resources, a feed-in tariff system for electricity produced from wind, solar, ocean, run-of-river hydropower and biomass the NREB is mandated to formulate and promulgate feed-in tariff system rules. The rule is supposed to cover the following areas of concerns, among others: (a) priority connections to the grid for electricity generated from emerging renewable energy resources such as wind, solar, ocean, run-of-river hydropower and biomass power plants within the territory of the Philippines; (b) the priority purchase and transmission of, and payment for, such electricity by the grid system operators; (c) determine the fixed tariff to be paid to electricity produced from each type of emerging renewable energy and the mandated number of years for the application of these rates, which shall not be less than 12 years; and (d) the feed-in tariff to be set shall be applied to the emerging renewable energy to be used in compliance with the renewable portfolio standard as provided for in this Act and in accordance with the RPS rules that will be established by the DOE.

What is feed-in tariff?

A feed-in tariff is a system designed to encourage the investment and use of renewable energy resources. Three factors are considered in the system. The first is guaranteed access to the power grid, like the Visayas Grid which is operated by the National Grid Corp. of the Philippines. The second is the long-term contracts for the electricity produced, and third is the purchase prices stated in the contract which in the case of the Philippines is determined by the National Renewable Energy Board and approved by the Energy Regulatory Commission.

The NREB was supposed to come out with the rules one year of the signing of the act in 2008. Many prospective investors in renewable energy or RE were concerned that the NREB took so long to promulgate the rules since the delay also caused them to be unsure of the return of their investments. However, now that it is out, many sectors are also unhappy. The problem is that while the new rules will now open the way for RE investors to finish their investment plans and implement them, many investors in the different sectors of the economy might also decide not to invest anymore because of the impact of the new rules in making the cost of electricity much higher than they are today, which already happens to be one, if not the highest in Asia.
What exactly are the proposed the feed-in rate rates?

The proposed rates, which are still subject to public hearing next month in Manila and here in Cebu, are as follows: P7 per kilowatt-hour (kWh) for biomass, P6.15/kWh for run-of-river hydroelectricity, P10.37/kWh for wind power, P17.65/kWh for ocean technology and P17.95/kWh for solar power. With these recommended rate, the NREB also proposed to be installed for renewable energy resources at 760 megawatts (MW), consisting of 250 MW each for hydro and biomass, 200 MW for wind, 50 MW for solar and 10 MW for ocean technology.

The Foundation for Economic Freedom is one of the groups that already strongly stated its strong objection to the proposal. In its position paper, it said that while they do not oppose renewable energy it is against the plan to make the consumers and industries in the country to cover the estimated additional P8 billion in additional payment for the use of electricity in the next 20 years to subsidize and guarantee the profit of the RE developers. What is prudent according to the FEF is to wait, given the advances in the development of new technology in the power sector, until the cost of solar and wind power drops to parity with conventional sources which are more efficient. Instead of putting more RE projects which are very expensive, the FEF proposed instead to rehabilitate and improve existing hydro and geothermal sources, which produce energy far cheaper than wind or solar. It cited that 15,000 megawatts of power from these two sources alone remained untapped.

This issue is really more complicated than it seems and it is really not easy to judge immediately if this is going to be for the good of all of us in the country. So let us watch out for the public hearing. If you are interested, I was told that the public hearing in Cebu will be on Sept. 27.

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About Me

FEF is a public advocacy organization dedicated to advancing the cause of economic and political liberty, good governance, secure and well-defined property rights, and market oriented reforms. It counts among its members former and present Cabinet secretaries and undersecretaries, leading figures in the academe, respected media personalities and opinion makers, and prominent members in the business and finance community.